Before getting into the details, we will take one step back to introduce the subject of today's analysis.

Intel Corporation is the foremost manufacturer of integrated circuits for computers. In fiscal 2009, Intel
had Net Income of $4.37 billion ($0.77 per share), down 17 percent from
$5.29 billion ($0.92 per share) in the previous year. Revenue slipped
6.5 percent, from $37.6 billion to $35.1 billion.

The
company's business is organized around nine product groups. The two
largest groups are PC Client and Data Center. The PC Client Group sells
microprocessors
and related products for desktop, notebook, and netbook computers. It
also markets wireless connectivity products. PC Client was responsible
for $26.2 billion of Revenue in 2009, nearly 75 percent of Intel's total
Revenue.

On 19 August 2010, Intel announced it would acquireMcAfee (NYSE:MFE), a maker of security software, for $7.7 billion. Intel management stated that security has joined "energy-efficient performance" and "Internet conductivity" as the three "pillars" that support computing today.

In a separate transaction, reported on 30 August, Intel agreed to purchaseInfineon’s (ETR: IFXA) Wireless Solutions Business for about $1.4 billion in cash. Intel believes this deal, which includes Infineon's ARM-based offerings, will strengthen its product line in the mobile computing market. Low-power ARM chips are inside most smartphone and tablets, including those sold by Apple (NASDAQ: AAPL).

Additional
background information about Intel and the business environment in
which it is currently operating can be found in the look-ahead.

Please click here
to see a normalized depiction of the actual and projected results for
the just-concluded quarter, as well as the quarterly Income Statements
for the last couple of years. Please note that our organization of
revenues, expenses, gains, and losses, which we use for all analyses,
can and often does differ in material respects from company-used
formats. The standardization facilitates cross-company comparisons.

Revenue
in the September quarter rose 18 percent, from $9.39 billion last year
to $11.1 billion (a record quarterly Revenue for Intel) in the last
three months. The reported amount was consistent with Intel's reduced guidance, issued on 27 August, that third-quarter Revenue would be in the $11 billion, plus or minus $200 million, range.

Revenue
in the latest quarter exceeded our $11.0 billion target, which was
based on the company's latest guidance, by 0.9 percent.

The PC
Client and Data Center Groups achieved robust Revenue growth rates of 14
percent and 30 percent, respectively, when compared to 2009's third
quarter. PC Client's Revenue was 73 percent of Intel's total Revenue in
the most recent quarter.

Revenue growth was over 20 percent in the Asia-Pacific, Americas, and Japan regions, but it was slightly negative in Europe.

Revenue
benefited from corporate customers refreshing their computing assets.
The average selling prices (ASP) for Intel's various microprocessors
were "approximately flat" when compared to the second quarter.
The one disappointment might be that revenue associated with the
low-cost Atom microprocessor was lower than in the second quarter.

The Cost of Goods Soldin the quarter was $3.78 billion, or 34.1 percent of Revenue. This ratio translates into a Gross Marginof 65.9 percent. The Gross Margin was significantly more profitable than the 57.6 percent of last year's third quarter.

Intel
said that the Gross Margin improved over the prior-year percentage
because of higher CPU and chipset average selling prices, lower CPU and
chipset unit costs, no excess capacity charges, and higher sales volume.

The
65.9-percent Gross Margin was near the midpoint of the company's
guidance of 66 percent, plus or minus one percent. We had also expected
the margin to be 66 percent in the third quarter. Intel's guidance for Research and Development and Sales, General, and Administrative
costs in the third quarter was $3.2 billion. They were close: the
actual figure was $3.18 billion. The R&D expense of $1.68 billion
was 4.7 percent more than our $1.6 billion estimate. Although R&D
was 17 percent more than last year, spending edged down 10 basis points
from 15.2 percent of Revenue to 15.1 percent.

The SG&A
expense of $1.51 billion was 5.9 percent less than our $1.6 billion
estimate. The reported expense was 14 percent more than in the third
quarter of 2009, and SG&A as a percentage of Revenue decreased 50
basis points, from 14.1 percent to 13.6 percent.

Other operating
expenses amounted to only $4 million. Special items have made the
"other" number much larger in some earlier quarters.

Subtracting the various operating expenses from Revenue yields Operating Income
of $4.14 billion, yet-another record for Intel. Better-than-expected
Revenue and lower SG&A costs allowed Operating Income to rise 2.1
percent above our $4.05 billion target for the third quarter.

The PC Client group was responsible for 83 percent of the company's Operating Income.

Intel
recorded a $77 million gain on equity investments, whereas we budgeted
for a $165 million gain. Interest and other non-operating income was
$38 million, which exceeded the $10 million we expected.

Earnings before taxes were $4.25 billion, less than 1 percent above our estimate.

The
quarter's effective income tax rate of 30.5 percent was less burdensome
than Intel's guidance to a expect a 32-percent tax rate in the second
half of the year. The company had more of its profits in lower-tax
jurisdictions than anticipated.

Net Income
was $2.96 billion ($0.52 per share), substantially better than earnings
of $1.86 billion ($0.33 per share) in last year's third quarter. Our
estimate for the latest quarter was $2.87 billion ($0.50 per share).
The lower-than-expected income tax rate was responsible for much of the
difference.

In summary, Intel's results were consistent, or
slightly better, that the company's reduced guidance for the quarter.
Pretax income was just slightly better than we expected, but a low tax
rate helped the reported EPS nose above our estimate by $0.02 per
share.

Disclosure

This blog describes and gives examples of a particular quantitative methodology, relying on published financial statements, to analyze businesses. The methodology does not evaluate every aspect of a company's finances or operations. Other analytical techniques may be better suited to some evaluations, depending on the type of business or the goals of the analysis. The material in the blog is not investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have, might once have had, or might be considering a position in the companies mentioned. Specific positions will not be disclosed. While good-faith efforts are made to use reliable information sources and to provide accurate analytical results, accuracy is not guaranteed. All results are subject to change without notification. Application of the analytical methodology described in this blog requires that various assumptions be made. The assumptions are generally not disclosed and are subject to error, invalidating some or all of the analysis results. In looking for trends, recent financial data is compared to historical financial data; however, underlying differences in the assumptions or presentation of the data might degrade or invalidate these comparisons and could produce erroneous or misleading results. Readers should independently validate any information in this blog that causes them to consider making or not making a financial transaction.